Our research empirically analyzes consumer behavior at Internet shopbots — sites that allow consumers to make “one-click ” price comparisons for product offerings from multiple retailers. By allowing researchers to observe exactly what information the consumer is shown and their search behavior in response to this information, shopbot data has unique strengths for analyzing consumer behavior. Furthermore, the method in which the data is displayed to consumers lends itself to a utility-based evaluation process, consistent with econometric analysis techniques. While price is an important determinant of customer choice, we find that, even among shopbot consumers, branded retailers and retailers a consumer visited previously hold significant price advantages in head-to-head price comparisons. Further, customers are very sensitive to how the total price is allocated among the item price, the shipping cost, and tax, and are also quite sensitive to the ordinal ranking of retailer offerings with respect to price. We also find that consumers use brand as a proxy for a retailer’s credibility with regard to non-contractible aspects of the product bundle such as shipping time. In each case our models accurately predict consumer behavior out of sample, suggesting

The market for music products has recently been subject to dramatic forces for change. We propose a model and theoretical perspective for understanding the transformation of the market structure in the recorded music industry value chain due to new forms of digital distribution. We take into account the traditional music industry’s value chain and distribution network, and the product characteristics of digital music as they relate to consumer value creation. We also showcase changes in market structure from the various perspectives of the players in the music industry value chain. We then present propositions that characterize the forces at work in market transformation and how each player’s role in the digital music industry value chain is likely to change. We also explain how intellectual property rights issues are affected by the market structure changes. Finally, we explore a number of industry mini-cases that provide evidence in support of our proposed theoretical perspective. ______________________________________________________________________________

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Policy is a series analyzing and discussing policy issues affecting the California economy.

A standard “solution ” offered to the deleterious effects of all-out price competition is for firms to engage in differentiation strategies. This solution, however, depends critically on the inability of rivals to imitate a successful differentiation strategy. With imitation, we show how “Red Queen ” pricing effects can arise: All firms have an incentive to vertically differentiate and increase markups,yetimitationbyrivalsdrivespricesdowntowardpre-differentiation levels. Thus, the price premia arising from differentiation strategies in e-retailing critically depend on the number of other firms that imitate the strategies. Based on data from Shopper.com, we find that an online firm that unilaterally differentiates itself from its rivals by participating in CNet’s Certified Merchant program enjoys a 5 to 17 percent price premium. However, when other firms also follow this strategy, the price premium vanishes.

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Investments in advertising to create brands provide one method for vendors to convince potential customers that vendors will deliver as promised. Alternatively, third-party information on whether retailers tend to keep their commitments can serve a similar function and may undermine investments in brand. This study uses a 13-month panel dataset on 1998-99 Internet shopping behavior and use of information intermediaries by over 30,000 households to examine whether information use undermines brand. We find that individuals using price comparison sites , such as DealTime and mySimon, reduce their Amazon shopping by about a tenth, while individuals using BizRate, which provides both price comparison and vendor reliability information, reduce their Amazon shopping by a quarter. The results have possible implications for both firm strategy and the evolution of market structure. If information weakens the pull of brand, then Internet retailing may grow less concentrated over time. We are grateful to the Wharton e-Business Initiative (WeBI) for financial support. Transactions are easier to consummate when customers have confidence that sellers will deliver as promised. Seller reputation, or brand, is one means by which firms have traditionally bonded their promises to deliver (Klein and Leffler, 1981). Firms' non-recoverable investments in brand capital, foregone if they renege, can convince consumers that sellers will deliver as promised. Consumer goods firms spend roughly $88 billion per year on advertising targeted at consumers.

This paper uses consumer search data to explain search frictions in online markets, within the context of an equilibrium search model. I use a novel dataset of consumer online browsing and purchasing behavior, which tracks all consumer search prior to each transaction. Using observed search intensities from the online book industry, I estimate search cost distributions that allow for asymmetric consumer sampling. Research on consumer search often assumes a symmetric sampling rule for analytical convenience despite its lack of realism. Search behavior in the online book industry is quite limited: in only 25 percent of the transactions did consumers visit more than one bookstore’s website. The industry is characterized by a strong consumer preference for certain retailers. Accounting for unequal consumer sampling halves the search cost estimates from $1.8 to $0.9 per search in the online book industry. Analysis of time spent online suggests substitution between the time consumers spend searching and the relative opportunity cost of their time. Retired people, those with lower education levels, and minorities (with the exception of Hispanics) spent significantly more time searching for a book online. There is a negative relationship between income levels and time spent searching. I bene…ted from comments from Jean-Pierre Dubé, Jeremy Fox, Matt Gentzkow, Austan Goolsbee, Günter Hitsch, Steven Levitt, Jesse Shapiro, Chad Syverson, and seminar participants at the

eliminated regional price differences?

Amazonis arguably one of the most successful online firms. As of this writing, its market value is over $79 billion, 40 percent higher than the combined value of two large and successful offline retailers, Target and Kohl’s, who have 2800 stores between them. Jeff Bezos conceived of Amazon as a business model with many potential advantages